The personal blog of Peter Lee a.k.a. "China Hand"... Life is a comedy to those who think, a tragedy to those who feel, and an open book to those who read. You are welcome to contact China Matters at the address chinamatters --a-- prlee.org or follow me on twitter @chinahand.

Sunday, April 08, 2007

From Illogic to Idiocy to Ignominy: Is the Hegira of the North Korean $25 Million Finally Over?

$25 million in accounts related to North Korean entities on deposit at Banco Delta Asia that were frozen by Macau’s monetary authority after the United States Treasury Department announced that BDA was a bank of “primary money laundering concern” looks like it’s finally headed to a North Korean account at Bank of China.

Maybe.

On April 5, the State Department announced that a “pathway” had been established for returning all of the $25 million.

That pathway apparently leads out of a maze of obstacles erected by the Treasury Department.

The administration appears to be united now that North Korea will receive all $25 million. Earlier this year, top State and Treasury department officials had suggested that only a portion of the money would be returned.

But McCormack said Friday, "We have arrived at the point where we . . . have expressed our support for release of all the funds."

The Treasury Department said it had "communicated its support for the release of all funds."

When United States officials announced a deal in mid-February under which North Korea agreed to freeze, and ultimately dismantle, its main nuclear complex, they said they expected that the illicitly gained money would still be withheld by the authorities in Macao.

I thought I was following this issue reasonably closely. I don’t recall any public statement from the U.S. along the lines of “North Korea’s not going to get some of the money back”.

Quite the contrary, in fact.

The buzzword was “resolving” the BDA issue, with the “details to be worked out between the North Koreans and the Macanese authorities”.

Of course, thanks to the Treasury Department, things hadn’t been going too smoothly.

First in a fit of passive-aggressive noodgery, Treasury withheld the final decision on BDA—which was needed by Macau in order to determine the ultimate regulatory status of the bank and dictate how the frozen accounts should be disposed of—until the absolute last day negotiated by the United States and North Korea: March 14.

The decision itself was a scorched earth condemnation of BDA, the accounts at BDA, and the North Korean government. The North Koreans might have entertained hopes that “resolution” of the BDA issue might have been shorthand for “cessation of U.S. activities to U.S. activities to ostracize North Korea from the world financial community”, but these hopes were certainly dashed by the Treasury decision.

But all in all, the North Koreans swallowed their disappointment and took it reasonably well.

And they waited for the BDA money to show up.

Initial public statements intentionally gave the impression that everything was hunky-dory.

Treasury’s undoubted concerns about the nature and destination of the funds were supposed to be addressed by plunking the money in a kind of escrow fund for “humanitarian and educational purposes”.

There’s no hint that moneys will be withheld.

In fact, here’s what the Treasury Department statement said on March 19:

"The DPRK has proposed the transfer of the roughly $25 million frozen in BDA into an account held by North Korea's Foreign Trade Bank at the Bank of China in Beijing.

"North Korea has pledged, within the framework of the Six-Party Talks, that these funds will be used solely for the betterment of the North Korean people, including for humanitarian and educational purposes. We believe this resolves the issue of the DPRK-related frozen funds.

"The disposition of the frozen assets has always been and remains a decision by the Macanese authorities to be taken in accordance with Macanese law. North Korea will need to work out the legal and technical intricacies of the arrangement with the Macanese. The Treasury has communicated to both the Macanese and Chinese Governments the United States' support of this arrangement.

And here’s what Hill and Glaser said in response to questions at the press conference in Beijing announcing the statement:

QUESTION: So does this mean that all the money is being released? Does this mean none of the money was involved in illegal activities?ASSISTANT SECRETARY HILL: What this means is the North Koreans, the DPRK, understood our concerns and are prepared to cooperate with us to make sure this money is used appropriately.QUESTION: Mr. Glaser, do you not have any concerns that this might send the wrong message, saying that all the money was involved in illicit activities?DEPUTY ASSISTANT SECRETARY GLASER: No, I think the message at this time is, as I said in the prepared statement, first of all, the broad message that I think it sends, is that we will not be tolerating illicit conduct by financial institutions in the international financial system. With respect to the actual disposition of the funds, I think it's important to look where we were eighteen months ago and look where we're going now. Eighteen months ago, these funds were in a bank that did not have adequate anti-money laundering protections and that was facilitating illicit activity. There was very little being done about it. Eighteen months later, the bank is under responsible management, and we have received assurances that the funds are going to be transferred to an account in Beijing that can allow them to be used for humanitarian purposes, for educational purposes.

I think that's a great success. It's all part of an ongoing process to work with North Korea on trying to address what we've said before are a lot of the fundamental underlying concerns of the international financial community.

Great success!

In retrospect, I suppose what he really meant was “great success in sticking a finger in North Korea’s eye while claiming it’s Macau’s faults so that the Six Party Agreement will collapse over $25 million in contested funds”.

Diplomacy is all nuance, I guess.

Nevertheless, when Christopher Hill negotiated the agreement with North Korea about “resolving” BDA as the first, critical confidence-building step, I don’t think his intention was to play word games and endanger the Six Party Agreement with a “gotcha! You’re not getting the money back after all!”.

So I call “nonsense” on the assertion that it was a matter of understood U.S. policy that the North Koreans weren’t supposed to get that money.

In fact, a focus of concern at the press conference was precisely the opposite: “why should licit business accounts improperly frozen because of a North Korean relationship be ‘returned’ to North Korea instead of released to the account holders” i.e. why should North Korea get all the money?

The DPRK pledge to spend the money on humanitarian and educational purposes—which they presumably agreed to as a gesture to help the U.S. save face—was completely illogical.

At least a third of the money was untainted by conventional standards, some of it belonging to a British-American Tobacco joint venture whose laudable purpose is to poison the North Korean elite with its potent and addictive cigarettes.

And what about account holders like Colin McAskill, who bought controlling interest in the Daedong Credit Bank, a North Korean institution that saw $7 million of its money frozen in BDA?

Arguing that this money is legit, McAskill is not unreasonably demanding that the Daedong money be carved out from the sanctioned accounts and, instead of being transferred to the Bank of China account of the North Korea’s Foreign Trade Bank—and squandered on DPRK humanitarian and educational purposes instead of used to clear whatever transactions it was involved in before it got stuck in the BDA quagmire--be allowed to disappear in an innocent, fungible way into the world banking system.

Well, did Treasury step up and say, legitimate account holders should get their money back, illegitimate money should be frozen, and the North Koreans will spend what’s left on humanitarian concerns?

Back to that press conference.

QUESTION: But it is not only North Korean Government but also the 50 account holders. All of them agree with this agreement? I mean, you know, the money to be used for the humanitarian assistance? Because the bank holders are not only North Korean government, right?

DEPUTY ASSISTANT SECRETARY GLASER: That's right. There are non-North Korean Government account holders, and again, this will have to be conducted within Macanese law. And I'm sure the Macanese and the North Koreans - I'm sure the Macanese will discuss it with the North Koreans and explain to them exactly what needs to be done to accomplish this.

ASSISTANT SECRETARY HILL: We're not here to explain Macanese laws and procedures. What we're here to do is explain our role, and the fact that we've concluded our role.

Not a lot of straight talk here. A lot of trying to hide behind the Macau Monetary Authority.

Thanks to the current spin that “not all the money was supposed to be returned”, at least we are receiving backhanded confirmation that, when Dan Glaser went to Macau in mid-March to “brief the Macanese monetary authorities on the determination and the evidence from Treasury’s investigation”, he was not expediting the Six Party Agreement.

In fact, the “S” word—“sabotage”—might be more appropriate.

He was really trying to get Macau to withhold some of the money and, in a rather graceless fashion, have Macau take the heat for an action that the world’s only superpower—or at least a faction within the Treasury Department of the WOS-- was unwilling to publicly take responsibility for.

That makes this statement from the March 19 press conference look kinda hypocritical:

"The disposition of the frozen assets has always been and remains a decision by the Macanese authorities to be taken in accordance with Macanese law. North Korea will need to work out the legal and technical intricacies of the arrangement with the Macanese. The Treasury has communicated to both the Macanese and Chinese Governments the United States' support of this arrangement.

As to whether the Macau authorities were enthusiastic and independent participants in this vendetta against BDA, or were tormented by the legal, fiduciary, and ethical implications of sending $25 million to the dictators of Pyongyang c/o an account in Beijing in support of an agreement that was supposed to save the region from an existential nuclear threat...

...it should be noted that the Macau authorities were not at all happy with the Treasury investigation and its characterization of the bank and its accounts.

In fact, prior to the draconian final Treasury decision, BDA was expected to be passed from its government receivers back into the hands of its owners with upgraded controls and a clean bill of health.

We can also safely say that Macau would have had absolutely no problem with shoveling the whole $25 million out the door, in order to close the books on this unpleasant episode and in order to please the Chinese government and expedite the Six Party Agreement.

In circumstances like this, $25 million is not a lot of money.

In order to make the deal work, Macau could have sent the $25 million to the North Korean account and indemnified BDA against claims by any legitimate account holder who showed up and could reasonably complain that his or her money shouldn’t have been shunted off to the North Korean government.

Now, with the admission that the US didn’t expect all the money to be sent back, we can state fairly confidently that, yes, Treasury was trying to stop the money at the Macau end but Macau didn’t play ball.

When the cooperation of Macau seemed less than wholehearted, Glaser perhaps made the tactical error of pulling out the big stick by declaring that any bank that handled funds Treasury deemed tainted would face the threat of a Patriot Act 311investigation of its own.

Since the intended recipient of the funds was none other than Bank of China, instead of caving, Macau got on the phone to its masters, and Glaser was on the next plane to Beijing.

Support of this thesis comes from the fact that, when the money didn’t show up—and the North Koreans walked out of the Six Party talks--there was no more of that “North Koreans have to talk to the Macanese” frou-frou.

Daniel Glaser had to come to Beijing to help “implement” the agreement—and, I suppose, explain to a rather grim-faced collection of Asiatics that what he had really meant by “implementation” was that he really didn’t want much of the money returned after all.

That perhaps made for some awkward moments.

I assume the Chinese demanded an explicit written waiver from the Treasury Department stating that Bank of China would be subject to no investigations or potential sanctions stemming from its role in handling the North Korean funds.

Given what we can gingerly characterize as Treasury’s bad faith in implementing the Six Partry Agreement, it would not be surprising that there was non-stop weaseling by Treasury in trying to assert its continued involvement in the BDA money, or that the Chinese demanded the most categorical, explicit, and uncaveated waiver possibly.

Treasury’s last riposte might have been attempting to assert that Bank of China has a special regulatory obligation, beyond normal due diligence and including special investigative and administrative actions, to monitor the flow of these funds out of the North Korea Foreign Trade Bank account.

In that March 19 press conference, Glaser had stated:

QUESTION: How do you verify the money will be used properly for humanitarian and educational purposes? How will the United States verify?

DEPUTY ASSISTANT SECRETARY GLASER: As I said, there are no guarantees in this, and we're embarking into this in the spirit of an ongoing process. We have received assurances. We're expecting that the assurances will be lived up to. We will be engaged in an ongoing dialogue, and we're going to have to take it from there. If North Korea wants to have access to the international financial system, they're going to have to start getting used to working productively with other members of the international financial system. Hopefully this is something that's going to be beneficial for everybody. We're going to continue to work with them. The funds are [to be deposited] in a Chinese bank, as Ambassador Hill said, regulated by Chinese regulators. We expect that people will live up to their obligations. [emphasis added]

Therefore, in addition to slapping down Patriot 311-related culpability for handling dirty money, I expect the Chinese government would also demand a written waiver that Bank of China would be exempt from special investigatory obligations or hazard relating to monitoring the expenditure of the money under the Six Party Agreement once it came into the account.

So I think Daniel Glaser spent two weeks in Beijing unsuccessfully searching for a face-saving formula that would avoid undermining his precious Patriot Act 311 powers or at least make more palatable the issuance of a formal U.S. government undertaking that it would close the books once and for all on the BDA money and not care where it went, who it went to, or if it was unfair or illegal.

Perhaps he had to sign off on each account individually, arguing down the list of 50 account holders individually and probably losing on most if not all of them.

The Chinese would have had the upper hand, knowing that the collapse of the Six Party Agreement would be laid at Treasury’s door—and reveal the United States as the superpower that could not honor the commitments of its diplomats.

That’s not a place the State Department—or the Bush administration--want to be, especially as the diplomatic and public relations campaign against Iran heats up.

And the State Department was happy to let Glaser twist in the wind, squandering his valuable time and precious prestige trying to wriggle his way out of his predicament as punishment for Treasury’s virtually overt attempts to sabotage the Six Party Agreement.